Imprimir

Cover

Risk capital and technology: a marriage of interests

Development Agencies propose the union of investment funds with technology based companies to capitalize and to favor the creation of innovative products

After having given an impulse to business on the Internet, risk capital has its eye on new markets. It has begun to adjust its focus to the small and medium companies emerging from a technological base, with capacity to develop products and innovative processes and with a large potential for growth in the market. Known throughout the world as venture capital, risk capital was fundamental for the development of companies such as Microsoft, Compaq, Sun and Federal Express, if only to cite some very successful examples.

In Brazil, risk capital is emerging as a possible alternative for small technological companies whose development could be compromised by the cost of money on the national market or even by the difficulty of obtaining financial resources in the banking sector, given the requirement of guarantees with property and signed agreements, among others, to which in the majority of cases these companies cannot comply.

Risk capital could make possible the expansion of new products in a way that they effectively translate themselves into commercial results. The guarantee of the investment, in this case, is the good idea, along with a solid business plan. The investor or investment fund would participate in the enterprise by way of the acquisition of shares or through buying into the emergent company. This participation normally gets to 40% of the total capital, which permits the capital investor to give his opinion and formally participate, for example, on the Board of Directors of the company. Risk capital is, at the moment, long term financing of between two and ten years, generally recoverable after the development of the company by way of the offering of shares on the market or of the total or partial sale of the enterprise.

This manner of investing could, for example, be an option to produce a leap forward in the 129 companies whose present research of innovative technology has received the support of FAPESP by the Program of Innovative Technology in Small Businesses (PIPE), and which need to bring to the marketplace the new products or services which are being developed. “One of the tariffs of FAPESP is to capture opportunities so that the businesses supported by PIPE have access to financial resources to invest.” said Dr. Carlos Henrique de Brito Cruz, President of the Foundation.

The PIPE, as has persistently been divulged, designates itself to the stimulation of innovative technological research in small Paulista businesses with at the maximum 100 employees, and deploys itself in two phases. In the first, with a time span of up to six months, the company receives up to a maximum of R$ 75,000.00 from FAPESP to develop studies of the technical and commercial viabilityof the project. During the second phase, assuming good results have been presented in the previous phase, the project receives additional resources of up to a maximum of R$300,000,00 for the carrying out of the proposed research during a period of at the maximum two years.

The Foundation does not grant resources for a third phase, the commercial implementation of the project, when it falls upon the company to assume the financial responsibility for its development. However, they still have at this point the support of FAPESP to look for financing from other sources, such as the Brazilian Service of Support of Micro and Small Companies (Sebrae) and the Financier of State Projects (Finep, an organ linked to the Ministry of Science and Technology) which relates directly to the market, supporting production.

Within its policy of support for innovative technology and small businesses, FAPESP promoted, on the morning of 29th of November, in its auditorium, and with the collaboration of Finesp and of Endeavor Brasil, the seminar “Innovative Technology and Risk Capital.” During the talks and debates which were part of the event, the researchers and entrepreneurs who participated on behalf of PIPE were introduced to the Project Inovar of Finep, and of the proposal of Endeavor Brasil, a non-governmental organization which promotes entrepreuneurship in developing countries.

Venture capital
The Project Inovar is one of the newest initiatives of Finep within its policy of inducement for the development of technology in the country. In partnership with other development agencies, the proposal of Inovar is to create an institutional background which stimulates the growth of the participation of risk capital in projects involving innovative technology in Brazil. Its strategy works through the creation of an encompassing institutional structure, capable of bringing together operatives of the risk capital market that are as yet dispersed throughout the national economy.

The project invests in the creation of physical and virtual space – such as Venture Forums and the Risk Capital Doorway to Brazil – for those who need to converge both businesses and investors. At the same time, Finep, in cooperation with the National Association of Incubators (Anprotec) and the Softex Society, are working at strategies to prospect and develop new and promising businesses by way of the Inovar Network. Another part of the agenda of the project is the implementation of programs of qualifying professionals who specialize in the evaluation of emerging businesses based on technology, in partnership with teaching institutions and with the participation of specialists in the area of risk capital.

The project includes the creation of a support structure which also permits the entrepreneurs to draft out business plans in the fashion required by the market.”Even though it is only a fishing project, it has to be organized as a business, in such a way as to attract the interest of private agencies.” said Jorge de Paula of Costa Ávilla, Director of Finep. “If the entrepreneurs manage to structure the information in an understandable manner, the investors may well participate in the project even before the product is made, betting on the idea.” he reckoned.

The idea of Inovar, he explained, came from the confirmation that there exists in the country, on one hand a fair level of research into technological developments, both in the research institutions and in small companies, and, on the other hand, something between US$ 1 billion and US$ 2 billion available to the market which could transform itself into risk capital. “The bottleneck is not in the offer of the entrepreneur nor in the money.” underlined Ávilla. Inovar wants to initially group together US$ 400 million for investments in emerging businesses.

Its strategy will be to stimulate the constitution of funds, and for this the project will directly apply R$ 100 million, an initial amount resulting from a partnership among Finep, Sebrae, the Interamerican Development Bank (BID) and the Pension Fund of Petrobras (Petros). From that point onwards, the intention is to attract new investors in a way as to multiply by four the initial capital. As well as capturing funds from national investors, there is the intention of making a road show with Brazilian funds so as to capture resources in the exterior. At this point, of the R$ 100 million to be invested directly by Inovar, R$ 30 million were made available to the Brasil Venture Fund of support for small businesses based on technology.

Attracting capital
In order to be a candidate for the resources of the investment funds capitalized by Inovar, the company must made its application through the Risk Capital Doorway (www.venturecapital.com.br). The projects are evaluated by committees of investments of each fund. The companies selected will be guided as to the drafting out of a business plan and their projects will be presented to interested investors. The fifteen best assessed plans will be invited to participate in the Venture Forums, organized by Inovar, which will unite entrepreneurs in search of resources and investors in search of good opportunities for investment. The cost of inscription is R$ 1,000.00 with the right to a true “window dressing” before the presentation of the project to the investors, which includes formal training, individual consulting and even a general rehearsal of a 12 minute presentation on the eve of the meeting.

For the first Venture Forum, which took place in Rio de Janeiro, 14 projects from the 300 which were inscribed, were selected. A biotechnology company and a software company have already closed out agreements for the capture of resources, which requires that their names cannot be identified. The second Venture Forum occurred on the 14th and 15th of December in Porto Alegre. 30 companies from the 400 candidates were pre-selected and of those 12 companies were classified to be presented to the investors. The next meeting will be in São Paulo during April of 2001, at a date as yet to be finalized. The goal is to pre-select 40 emerging companies and to elect 20 finalists. The inscription, through the Doorway, finishes on the 4th of February and the selection will be done during the 12th and 13th of February.

As well as Inovar, the technology companies can also approach risk capital investors via the intermediation of Endeavor, a North American Non-Governmental Organization (ONG), created by a group of ex-students of the University of Harvard. This organization is already operating in Chile and the Argentine, where it has already gathered together US$ 800 million for the projects of 65 entrepreneurs and 39 companies, among them Patagom.com, a site which offers financial services on-line, recently sold to the Santander Bank. Endeavor has been in Brazil since June of this year.

The organization is made up of a board and assisted by venture corps, a group of executives with considerable experience in the market, which takes the role of orientator to the entrepreneurs when negotiating with the market. “In the United States, since 1980, 50% of all the innovative technology has had its origin in small businesses.” stated Marilia Rocca, Director-General of Endeavor. The focus of attention of this organization is the innovation and the entrepreneur, not the company. The objective is to incentivate the risk capital through the interaction investor-entrepreneur. The proposals are sent to the entity via site (www. endeavor.org.br) to be evaluated by the board with the assistance of venture corps .

As well as the technical and methodology criteria in the selection of the projects, there are also observed the profile of the proponent and the potential growth of the project. The entrepreneurs selected receive orientation from professionals with Masters in Business Administration (MBA), graduates in Brazilian and North American universities. As well, they can count upon the support of assessors of a high level for the definition of judicial aspects and for the registration of a patent or for the analysis of the market, among other aspects which give consistency to the project.

In the first selection which took place in Brazil, 350 candidates inscribed. At the end only four were considered qualified to receive the assistance of Endeavor. “In a certain manner,” said Marília Rocca, “the fact that only four companies survived, was reflected in the climate of euphoria through the Internet, which provoked various types of misunderstandings in the minds of people. There were lots of ideas, but not company projects.”

Administrative experience
The first company to obtain financing by intermediary of the ONG was the firm from the State of Santa Catarina, Nano Endoluminal, which produces prosthesis for the treatment of aneurysm. This company, besides, won the Finep Award for Innovative Technology 2000. Another three proposals are under negotiation: that of Solvo Automatos, from Rio de Janeiro, a company in distance telemetry, that of Rede Omega, from Curitiba, which develops wireless solutions telecommunications without wire), and of MultiDelivery, from São Paulo, in the logistics of food distribution. For giving all the assistance up until the point of receiving financial support, Endeavor receives a 2% participation in the partnership of the company.

Among the rejected projects, some could be re-presented, such as, for example, the Paulista projects e-Fotos, which carries out digital developing via the Internet, and SOS Stress, for the treatment of stress using multi-media resources. One of the partners of Endeavor in the support of entrepreneurs is GP Investimentos, which administers two funds with a total of US$ 1.3 billion, and has participation in companies such as Telemar and Globo Cabo. Around a year and a half ago, GP began to invest in technologies on the Internet and helped in the take off of companies such as Patagom.com. Now it is diversifying its portfolio of investments. This, as well, is a tendency of the market confirmed by Carlos Steffen, a partner in Steffen e Pozzi, a consulting company with its headquarters in Porto Alegre.

“We have information on more than 30 national and foreign funds which affirm to be interested in diversifying their investments in technology projects but out of the field of the Internet.” he guaranteed. According to Marcos Perlman, of GP Investimentos, risk capital guarantees the financial capacity of an emerging company and, at the same time, transfers to it its administrative experience, understanding of the marketplace and business agility. “The venture capital game is quick, with successive rounds of investment.” he explained.

In the first stage there are invested resources for the launching of the business and the initial operation of the company. In the second and third stages, the strategy is to look for co-investors to expand and consolidate the company. “In the final stage,” he said ” the venture capitalists look for remuneration for their investments and the alternatives range from the strategic sale of the company to the launch of shares on the stock market.”

The business plan is essential, but as well the entrepreneur must show the capacity to execute it, to have an understanding of the market potential and of his position in relation to competitors. The proposals are evaluated by taking into consideration the sources of income, the risk and above all the size and the market prospects. “We don’t invest in very specific markets.” he hastened to add.

Co-agreement Fund
The Secretary of Science, Technology and Economic Development, José Anibal Peres Pontes, present at the opening of the meeting on risk capital sponsored by FAPESP, informed the businessmen that the Government of the State of São Paulo will begin to operate in January, a Co-agreement Fund with resources from the National Bank of Economic and Social Development (BNDES), directed towards the productive chains and special products such as those developed by small technology companies. “The Fund will co-sign 80% of the credit operations of these companies. They are resources for the financing of machinery, equipment and for turnover capital.” he added. “Innovative technology is a basic condition for an active position in relation to the economy. Either one has the capacity to accumulate excellence or one does not go ahead.” he concluded.

The obstacle race

What is the market?
Make an evaluation of the size and of the prospects in the segment which you will be going into.
What are the incomes?
Explain the prospects for sales, the sources of income of the product and the index of growth of the company.
What are the margins?
Elaborate the percentages cost price to sales price and give a perspective of the time before showing a profit.
Who are the team?
Show the curriculums with the qualities of each person who will be included in the project.
What are the risks?
Analyze the competition, new technologies and the legal aspects.

**

Money with participation

The story of two companies which grew through risk capital

Fifty million US dollars. This was the result of a pilgrimage of three partners of the Paulista company comDomínio from 20 banks and investment funds in the United States in search of capital which will be risked in the first company in Brazil of Internet Hosting Centers, or data centers. This is an enterprise specializing in the hosting of sites, providers and other types of equipment for companies of all sizes which integrate themselves to the world network of computers. The three partners are professors in the Institute of Chemistry at the University of São Paulo (USP) Fernando Reinach, the ex-President of BNDES and of the Central Bank, Pérsio Arida and the administrator Lúcia Hauptman, who has worked with several investment banks.

“We had the idea and knew that this type of business was new and had already been successful in the United States.” explained Reinach. His experience on the Internet is history. He was one of the coordinators of the information technology commission which, in 1986, implanted the Internet in USP. At that time the network was still restricted to the academic world. In November of 1999, the three partners mounted the company with two other employees. They made a detailed business plan and went out to battle. After their pilgrimage, they received seven proposals indicating the value of the investment and, for this money, how much of a share the banks would want in the company.

“We chose the best proposal, that of the bank JP Morgan (recently bought over by Chase Manhattan) by way of two funds, one of technology for Latin America and the other global for telecommunications.” affirmed Reinach. They began the process of obtaining money in May of that year and by August they had already closed the deal with JP Morgan and could count on US$ 50 million deposited in the company’s account. Though they prefer to remain silent about the fraction of the company which remained with the bank, Reinach affirmed that “It was more than 50%”. Even when buying the major part of the company, JP Morgan has nobody in the administration of comDomínio. “The executives of the funds only participate in meetings of the Board of Directors.” related Reinach.

In truth, the three partners didn’t even need to go to the United States to close the deal with JP Morgan. They discovered during the negotiations that the bank has an office in São Paulo where it also receives projects from emerging companies. “They are looking for new projects. Risk capital is beginning to come to Brazil because they feel that the economy is more stable and that they could recover their investment within 3 to 7 years.” analyzed Reinach.

After installing the company and getting it working, the partners will complete by the end of this year the hiring of 70 employees which make up comDomínio in São Paulo. In the plans for the company is the installation of four more data centers. “The first is scheduled for the city of Rio de Janeiro and the other three are as yet secret.” said Reinach. As well as the same services given to its clients, these enterprises are installed in buildings with between 5 and 6 thousand m2 connected to fiber optics which interlink them to all of the skeleton of the Internet network.

The first biotechnology company
Everything leads one to believe that the first biotechnology company in Brazil is FK-Biotecnologia, of Porto Alegre (RS), under the command of the doctor and immunologist Fernando Thomé Kreutz. To produce 40 types of monoclonal antibodies for clinical examinations, as well as acting as tumor markers,he managed to obtain the financial support of R$ 625,000.00 from the Investment Fund for Emerging Companies (RSTec) of the Companhia Riograndense de Participações (CRP), which has as its shareholders a group of private investors, such as the groups Gerdau and Ipiranga, as well as the Interamerican Development Bank (BID) and Banrisul, belonging to the State government.

To acquire the investment, Dr. Kreutz detailed out, with the assistance of a consultant from Sebrae, a business plan of 150 pages. “It was a piece of work very commercially detailed, with 50 tables, projecting the plans of cost, sales and profit.” For the financial support, 25% of the shares of FK were passed to CRP. Before this investment, which occurred in August of this year, Dr. Kreutz received financing from a Canadian angel investor to the value of US$ 20,000. This investor is a friend of Dr. Kreutz from the time that he worked in Canada between 1996 and 1998, as a researcher in the biotechnology company Alta Rex. The Canadian participation in the company is of 2% of the 75% which remained with the founder of FK.

Cancer treatment
Dr. Kreutz is a professor at the Federal University of Rio Grande do Sul (UFRGS) and the products which he began to produce in February don’t have anything similar in Brazil. Here, other companies import the reagents and mount the kits. “We have developed and are producing the products in their entirety.” affirmed Dr. Kreutz, who installed the FK in the Technological Incubator Cientec, linked to the Secretary of Science and Technology of the State.

The development of antibodies and of the markers is a result of ten years of work at the UFRGS. For this participation, the University will receive royalties when sales begin. Dr. Kreutz is also pursuing an experimental technique of otology vaccine (made from material of the patient himself) for the treatment of cancer, and which has already lead to the solicitation of a patent at the National Institute of Industrial Property (INPI).

**

Risk Capital (venture capital )
It is every sort of the investment practiced by companies, persons, or investment funds (banking institutions or not) in the financing of companies being formed or recently formed and technology based which have good prospects for development. The risk is of investing in something new, many times untested on the market, but which, if it goes well, the owners of the money are going to make a profit many time more than the normal application offered by the financial market. The capital sum is given in exchange for the acquisition of shares or of the buying of part of the company, normally lower than 40%, which guarantees the provider of risk capital the participation in the destiny of the company as he is normally part of the Board of Directors. In some cases this type of accompaniment does not exist. The venture capital is always a long term financing, from two to ten years, generally recovered after the development of the company when a total or partial sale of the business takes place with the offer of shares on the open market.

Angel Investors
Individuals who have ready money, often coming from other successful enterprises, ready to invest in emerging companies linked to technology. They are in search of long term investments which can give a greater return than the benign financial market. As well as acquiring participation in the enterprise, not necessarily through shares but as minor partners, they can participate as excellent advisors in the company, since, normally, they have experience in business administration. After the circle of family and friends, they are the best bet to make a financial investment (less than the investment companies and investment funds) in an emerging company.

Business Plan
The presentation of the project of the company in an ample and detailed form. In this plan there should be detailed the objectives of the enterprise, the method of production and management, marketing and plans for the product. As well, there should be an analysis of the prospects and of the current situation of the specific market with details about the future profitability of the company.

Republish